Background

The Department of Education is continually evaluating the measures it uses to exercise its statutory oversight of the institutions participating in the Title IV programs that are authorized by the Higher Education Act (HEA). In this regard, the Department is interested in improving its oversight of such institutions, based on its experiences with the application of current tests and standards to financial statements (Note: please see KPMG August 1, 1996 Report to view or download summary report pertaining to this effort). The KPMG Final Report will be available at this site soon.

As part of its overall effort to improve its measures of financial responsibility, and as part of the Secretary's overall commitment to improve the quality, efficiency, and effectiveness of its oversight responsibility, the Department commissioned in the Fall of 1995 the accounting firm of KPMG Peat Marwick, LLP to examine the current regulatory measures, and recommend improvements to those measures, especially in terms of taking into account the institution's business sector and total financial condition. The goal of the study was the development of processes, measures, and standards the Secretary could use to better assess risk to federal funds through the analysis of financial statements and other documentation.

Over the past 20 years, KPMG has developed a methodology that uses ratios to measure key elements common across all business sectors. These ratios are constructed so that the individual numerators and denominators are defined in such a way that they can be easily drawn from the financial statements of institutions from different business segments. Drawing upon this methodology and on professional experience and literature in the field, KPMG conducted this study for the Department during the Fall of 1995 and Spring of 1996.

On September 20, 1996, the Department published in the Federal Register
a notice of proposed rulemaking (NPRM) regarding standards of financial responsibility. The proposed standards would apply to all institutions that participate in the Title IV programs. The Secretary, in the NPRM published on September 20, 1996, proposed adopting the methodology recommended in the KPMG August 1, 1996 Report to replace the ratio methodology now contained in the regulations. For the most part, the Secretary proposed this methodology without change in order to seek comment from the community on the merits of this approach.

On November 29, 1996, the Department published in the Federal Register
a final rule revising requirements for compliance audits and audited financial statements, revising the two-year performance exemption to the refund reserve requirement, and adding financial responsibility requirements for foreign schools. These final regulations, however, did not contain changes to the general standards of financial responsibility. In response to public comment on the proposed rules, the Secretary decided to seek further comment and delay publishing final rules implementing new financial responsibility standards based on the proposed ratio methodology.

On December 18, 1996, the Department published in the Federal Register
a notice that reopened for 60 days the comment period for several parts of the September 20, 1996 NPRM. The Secretary extended the comment period to give institutions, higher education associations, and other interested parties more time to evaluate further the proposed ratio methodology and standards, and to prepare comments and recommendations based on additional analyses. In addition, the Secretary invited comment on several topics that were originally raised in the NPRM and noted by commenters as areas of special concern.

The Secretary continues to encourage the community to comment on the proposed methodology and to provide recommendations for possible revisions to the proposed ratio methodology. As KPMG and the Department reexamine the proposed ratio methodology, the Secretary will make available in a series of meetings and other venues (including this World Wide Web site) further information and analyses, including possible changes, related to the proposed ratio methodology.

Updates

Recent Developments in the Financial Responsibility Regulation

As part of its continuing work to develop a final rule for financial responsibility, the Department of Education has conducted two meetings to gain further comments and insight. On February 5, 1997, the Department gathered more than 20 members of the postsecondary community, including representatives from higher education associations, owners of proprietary institutions, and presidents and other officials from colleges and universities. On February 27, 1997, the Department met with a small group of proprietary institutions.

UPDATE -- April 8, 1997

The Department of Education continues to receive comments and suggestions regarding the proposed rule for financial responsibility. The Department indicated in prior meetings with the community that it would try to provide some insight into the specific ratio strength factors and weights that are being considered by the Department and KPMG Peat Marwick. This discussion paper that outlines some of these issues is being provided in the hope that it may help the community as it prepares to submit comments to the proposed rule. The public comment period ends on April 14, 1997.

UPDATE -- March 24, 1997

As indicated on the March 20, 1997, Federal Register notice, the Department of Education extends the public comment period to the Notice of Proposed Rulemaking to April 14, 1997. In addition, the Department has compiled the notes from the March 11, 1997 meeting with the postsecondary community regarding these proposed rules.

UPDATE -- March 17, 1997

Later this week, the Department intends to publish a notice in the Federal Register that will extend the public comment period on the proposed rules for financial responsibility to April 14, 1997. More information, including the notes and presentation from the most recent meeting with the postsecondary community on March 11, 1997, will be posted to this site in the near future.

UPDATE -- March 10, 1997

As part of its continuing work to develop a final rule for financial responsibility, the Department of Education has conducted two meetings to gain further comments and insight. On February 5, 1997, the Department gathered more than 20 members of the postsecondary community, including representatives from higher education associations, owners of proprietary institutions, and presidents and other officials from colleges and universities. On February 27, 1997, the Department met with a small group of proprietary institutions.

All comments concerning these proposed rules on financial responsibility should be addressed to Mr. David Lorenzo, U.S. Department of Education, P.O. Box 23272, Washington, D.C. 20026, or to the following internet address: fin.resp@ed.gov.

KPMG August 1, 1996 Report on Financial Responsibility

As part of its overall effort to improve its measures of financial responsibility, and as part of the Secretary of Education's overall commitment to improve the quality, efficiency, and effectiveness of its oversight responsibility, the Department of Education commissioned in the Fall of 1995 the accounting firm of KPMG Peat Marwick, LLP to examine the current regulatory measures, and recommend improvements to those measures, especially in terms of taking into account the institution's business sector and total financial condition. The goal of the study was the development of processes, measures, and standards the Secretary could use to better assess risk to federal funds through the analysis of financial statements and other documentation.

The August 1, 1996 report from the KPMG study is in the following zipped file formats: